The recovery taking hold across the national office market has yet to materialize in Denver, where plummeting valuations have forced landlords such as Brookfield Properties to accept steep price cuts in order to quickly offload troubled assets.
The investment firm closed a deal to sell its Johns Manville Plaza office complex in downtown Denver for less than $57.5 million. The sale price represents a more than 85% discount compared to the $400 million Brookfield paid for the two-building portfolio in February 2020, just before the onset of the pandemic.
The deal comes as the region attempts to rebuild momentum it lost to the pandemic, an effort that has so far been largely elusive as vacancy rates have hit record highs and leasing activity has all but evaporated.
Wayzata Investment Partners, a private investment firm based in Minnesota, was the buyer in the deal for the two buildings at 707 and 717 17th St. The properties collectively span more than 1.4 million square feet and are about 60% occupied, according to CoStar data.
Brookfield's own acquisition of the portfolio landed weeks before the pandemic sent the national office market into a yearslong freeze, when tenants offloaded record amounts of space, halted future real estate decisions and left landlords in perilous financial positions.
The combination of depressed demand, stagnant leasing and the ongoing effects of flexible work has helped push the national office vacancy rate to a record high of more than 14%, according to CoStar data. Tenants collectively handed back upward of 65 million square feet last year, boosting the total to more than 210 million square feet of move-outs since the start of 2020.
Eating the loss
Those pandemic-induced factors have been exacerbated for a number of property owners, and some — especially if they're facing maturing loan deadlines or mounting expenses — have been eager to offload underperforming properties or ones that no longer fit with their future investment strategies.
Denver, especially its downtown area, has been a headliner for those challenges as a spate of recent office deals have closed for just a fraction of earlier valuations.
Depressed demand has pushed the office vacancy rate in the city up to nearly 18%, according to CoStar data, among the highest in the country. The average lease size in the second quarter was just 3,200 square feet, a more than 40% drop compared with deals signed about a decade ago.
Tenants in the Denver area have collectively handed back 2.3 million square feet more than they've leased over the past year, according to CoStar data. Yet, there are some very preliminary indicators that the rate of large downsizings and move-outs is beginning to slow, and leasing — while far from pre-pandemic levels — is at least nearing a plateau.
Investors such as Wayzata are willing to bet that the widespread recovery taking hold across the national office market will soon extend to Denver and better position their recent purchases.
A joint venture between Tourmaline Capital Partners and Balfour Pacific, for example, recently dropped $33 million to become the newest face of The Hub, a nearly 115,700-square-foot property in the city's popular RiNo district that was surrendered earlier this year. The latest price tag marked a steep drop from the $40.5 million the previous owners paid for the eight-story property at 3660 Blake St. during the height of the pandemic in September 2021.